IMF urges caution as house prices surge globally

IMF assistant director Prakash Loungani tells Eamon Quinn about concerns over the supply chain crunch affecting housing
IMF urges caution as house prices surge globally

The IMF in its new research has been monitoring the house price increases already evident at the end of last year as the global economy emerged from its worst crisis since the great financial crash of over a decade ago. Picture: Sam Boal

The IMF has said it's time to be cautious about a new global house prices boom in many countries including in Ireland, that is being fuelled by an unusual mix of increases in the costs of building materials and by mortgage rates at rock-bottom levels.

In an interview, Prakash Loungani, assistant director at the IMF in Washington, said low interest rates and surging building materials costs amid the huge disruption that the Covid crisis had caused to global supply chains, were common factors helping to push house prices higher around the world.

The IMF in its new research has been monitoring the house price increases already evident at the end of last year as the global economy emerged from its worst crisis since the great financial crash of over a decade ago.

Mr Loungani told the Irish Examiner that increases in global house prices could be similar to the boom ahead of the financial crisis. “I would say it is clearly a moment for caution and to be cautious about the housing sector," the IMF assistant director said. 

He said that although the reasons for the global housing boom prior to the financial crisis were different, that the IMF nevertheless was seeing a similar sharp increase in prices in terms of scale and its pervasiveness in countries. 

Despite the IMF seeing that the underlying causes were different this time he said "nevertheless we have to be cautious given what happened last time”.  

Pressures on house prices and surging material costs because of the global supply crunch have continued to build around the world.

Irish house prices in late summer surged by almost 11%, and prices outside the Dublin region had risen faster again, by 11.5%, the most recent CSO figures show. Surveys also show a steep rise in rents.  

The Society of Chartered Surveyors Ireland last week warned that at over 8%, the costs of building materials have doubled since the onset of the Covid pandemic and were running at Celtic Tiger rates. The chartered surveyors see no let-up in the pace of Irish price hikes for building materials any time soon. 

Asked whether ECB interest rates, which were likely to remain at low levels for a number of years, amid the spike in building materials costs, had ratcheted up the danger for countries such as Ireland that had gone through disastrous house price bubbles, Mr Loungani said there was nonetheless hope that the lessons from the past had been taken on board. 

"The hope is that having lived through that experience, and I don’t just mean Ireland but many countries, a decade ago that there will not be a repeat of that," Mr Loungani said. 

He said the latest assessment by the IMF carried hope that the "normalisation" of interest rates would in time help to contain any repeat of a harmful residential property price boom around the world. 

He said that IMF research had substantiated that interest rates do play a major role in helping to contain house price inflation, noting that in the US, at least, there was the start of talk that interest rates would move higher. 

"We are thinking of a medium-term scenario, five years out, you would think that we would start with a normalisation of interest rates. And that is the scenario we have in mind. In the short run, it could contribute to the demand pressures if people feel that they better lock in mortgages," he said. 

Mr Loungani said that the so-called macro-prudential measures applied by many central banks and regulators following the financial crash of a decade ago, which include rules on how much households can get in mortgage loans and how much banks can lend, are important levers regardless of the levels of interest rates.        

Around the world, "the macro-prudential rules are here to stay", he said, and that it "is one of the lessons that central bankers and regulators have taken from the previous crisis: You need to be on your toes".

"I can't talk specifically about Ireland, but globally the scenario we have is that the macro-prudential rules remain important pretty much at any interest rate level. When interest rates are low and housing demand is high, perhaps they are needed more, but we think these are steps that are often curbing exuberance and speculative demand that can occur at any interest rates," Mr Loungani said.  

In Ireland, the mortgage rules were ushered in by former Central Bank governor Philip Lane in the wake of the property crash. Mr Lane is now the ECB's chief economist in Frankfurt. The Irish Central Bank is currently carrying out a regular review of the mortgage rules. 

Mr Loungani said the current house prices boom has increased risks but was not specific to just one or two countries. However, although not linked to a ballooning credit as in the past that "we have to be vigilant nonetheless", the IMF assistant director said. 

The risk between credit growth and house price growth that existed ahead of the the financial crisis of a decade ago was not as strong at the moment, which explains the reason the IMF is still hopeful for a soft landing for global house prices, he said. 

"It is pretty widespread and the global risk factors are low interest rates and the supply shortages," he said. 

In their report, the Irish chartered surveyors said the scale of the price increases for building materials was much greater than anticipated due to supply chain issues and intense competition internationally for building materials. The surveyors said there were exceptional price hikes in Ireland for widely-used materials such as steel, timber, and insulation products. 

The warning came amid the disruption caused by Covid shutdowns to house building sites that had worsened housing shortages.    

                      

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